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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2019

or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

FOR THE TRANSITION PERIOD FROM                 TO

Commission File Number:

001-12251

 

AMERISAFE, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

Texas

 

75-2069407

(State of Incorporation)

 

(I.R.S. Employer Identification Number)

 

 

 

2301 Highway 190 West, DeRidder, Louisiana

 

70634

(Address of Principal Executive Offices)

 

(Zip Code)

Registrant’s telephone number, including area code: (337463-9052

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

 

Title of each class

 

Trading Symbol(s)

 

Name of each exchange on which registered

Common

 

AMSF

 

NASDAQ

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files).    Yes     No  

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer

 

  

Accelerated filer

 

Non-accelerated filer

 

  

  

Smaller reporting company

 

 

 

 

 

Emerging growth company

 

 

If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes       No  

As of October 29, 2019, there were 19,300,309 shares of the Registrant’s common stock, par value $0.01 per share, outstanding.

 

 


TABLE OF CONTENTS

 

 

 

 

Page

 

 

 

No.

 

 

 

 

FORWARD-LOOKING STATEMENTS

3

 

 

 

 

PART I - FINANCIAL INFORMATION

 

 

 

 

 

Item 1

 

Financial Statements

4

 

 

 

 

Item 2

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

22

 

 

 

 

Item 3

 

Quantitative and Qualitative Disclosures About Market Risk

27

 

 

 

 

Item 4

 

Controls and Procedures

28

 

 

 

 

PART II - OTHER INFORMATION

 

 

 

 

 

Item 2

 

Unregistered Sales of Equity Securities and Use of Proceeds

29

 

 

 

 

Item 6

 

Exhibits

29

 

2


FORWARD-LOOKING STATEMENTS

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and 21E of the Securities Exchange Act of 1934. You should not place undue reliance on these statements. These forward-looking statements include statements that reflect the current views of our senior management with respect to our financial performance and future events with respect to our business and the insurance industry in general. Statements that include the words “expect,” “intend,” “plan,” “believe,” “project,” “forecast,” “estimate,” “may,” “should,” “anticipate” and similar statements of a future or forward-looking nature identify forward-looking statements. Forward-looking statements address matters that involve risks and uncertainties. Accordingly, there are or will be important factors that could cause our actual results to differ materially from those indicated in these statements. We believe that these factors include, but are not limited to, the following:

 

the cyclical nature of the workers’ compensation insurance industry;

 

increased competition on the basis of types of insurance offered, premium rates, coverage availability, payment terms, claims management, safety services, policy terms, overall financial strength, financial ratings and reputation;

 

general economic conditions, including recession, inflation, performance of financial markets, interest rates, unemployment rates and fluctuating asset values;

 

changes in relationships with independent agencies;

 

developments in capital markets that adversely affect the performance of our investments;

 

technology breaches or failures, including those resulting from a malicious cyber attack on the Company or its policyholders and medical providers;

 

decreased level of business activity of our policyholders caused by decreased business activity generally, and in particular in the industries we target;

 

greater frequency or severity of claims and loss activity than our underwriting, reserving or investment practices anticipate based on historical experience or industry data;

 

adverse developments in economic, competitive, judicial or regulatory conditions within the workers’ compensation insurance industry;

 

loss of the services of any of our senior management or other key employees;

 

changes in regulations, laws, rates, rating factors, or taxes applicable to the Company, its policyholders or the agencies that sell its insurance;

 

changes in current accounting standards or new accounting standards;

 

changes in legal theories of liability under our insurance policies;

 

changes in rating agency policies, practices or ratings;

 

changes in the availability, cost or quality of reinsurance and the failure of our reinsurers to pay claims in a timely manner or at all;

 

the effects of U.S. involvement in hostilities with other countries and large-scale acts of terrorism, or the threat of hostilities or terrorist acts; and

 

other risks and uncertainties described from time to time in the Company’s filings with the Securities and Exchange Commission (“SEC”).

The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements in this report, and under the caption “Risk Factors” in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2018. If one or more events related to these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from what we anticipate.

3


PART I - FINANCIAL INFORMATION

Item 1. Financial Statements.

AMERISAFE, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

 

 

 

September 30, 2019

 

 

December 31, 2018

 

 

 

(unaudited)

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

Investments:

 

 

 

 

 

 

 

 

Fixed maturity securities—held-to-maturity, at amortized cost

   (fair value $626,603 and $616,772 in 2019 and 2018, respectively)

 

$

604,161

 

 

$

613,878

 

Fixed maturity securities—available-for-sale, at fair value

   (amortized cost $424,270 and $479,772 in 2019 and 2018, respectively)

 

 

440,217

 

 

 

478,730

 

Equity securities, at fair value

   (cost $24,082 and $19,962 in 2019 and 2018, respectively)

 

 

25,936

 

 

 

18,651

 

Short-term investments

 

 

20,964

 

 

 

14,231

 

Total investments

 

 

1,091,278

 

 

 

1,125,490

 

Cash and cash equivalents

 

 

125,870

 

 

 

40,344

 

Amounts recoverable from reinsurers

 

 

102,866

 

 

 

112,006

 

Premiums receivable, net of allowance

 

 

170,649

 

 

 

162,478

 

Deferred income taxes

 

 

18,480

 

 

 

21,852

 

Accrued interest receivable

 

 

10,404

 

 

 

10,197

 

Property and equipment, net

 

 

6,430

 

 

 

6,258

 

Deferred policy acquisition costs

 

 

20,341

 

 

 

19,734

 

Other assets

 

 

28,221

 

 

 

17,572

 

Total assets

 

$

1,574,539

 

 

$

1,515,931

 

Liabilities and shareholders’ equity

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

Reserves for loss and loss adjustment expenses

 

$

790,812

 

 

$

798,409

 

Unearned premiums

 

 

154,635

 

 

 

149,296

 

Amounts held for others

 

 

45,216

 

 

 

41,388

 

Policyholder deposits

 

 

45,383

 

 

 

46,795

 

Insurance-related assessments

 

 

29,035

 

 

 

28,258

 

Federal income tax payable

 

 

1,549

 

 

 

3,412

 

Accounts payable and other liabilities

 

 

39,180

 

 

 

38,611

 

Total liabilities

 

 

1,105,810

 

 

 

1,106,169

 

Shareholders’ equity:

 

 

 

 

 

 

 

 

Common stock:  voting—$0.01 par value authorized shares—50,000,000

   in 2019 and 2018; 20,558,559 and 20,528,230 shares issued and 19,300,309

   and 19,269,980  shares outstanding in 2019 and 2018, respectively

 

 

205

 

 

 

205

 

Additional paid-in capital

 

 

212,743

 

 

 

211,431

 

Treasury stock, at cost (1,258,250 shares in 2019 and 2018)

 

 

(22,370

)

 

 

(22,370

)

Accumulated earnings

 

 

265,536

 

 

 

221,328

 

Accumulated other comprehensive income (loss), net

 

 

12,615

 

 

 

(832

)

Total shareholders’ equity

 

 

468,729

 

 

 

409,762

 

Total liabilities and shareholders’ equity

 

$

1,574,539

 

 

$

1,515,931

 

 

See accompanying notes.

4


AMERISAFE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except share and per share data)

(unaudited)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Revenues

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross premiums written

 

$

82,629

 

 

$

85,324

 

 

$

262,754

 

 

$

276,368

 

Ceded premiums written

 

 

(2,170

)

 

 

(2,283

)

 

 

(6,804

)

 

 

(6,982

)

Net premiums written

 

$

80,459

 

 

$

83,041

 

 

$

255,950

 

 

$

269,386

 

Net premiums earned

 

$

82,712

 

 

$

85,184

 

 

$

250,611

 

 

$

261,489

 

Net investment income

 

 

8,264

 

 

 

7,884

 

 

 

24,448

 

 

 

22,396

 

Net realized losses on investments

 

 

(4

)

 

 

(329

)

 

 

(27

)

 

 

(1,471

)

Net unrealized gains on equity securities

 

 

365

 

 

 

573

 

 

 

3,165

 

 

 

259

 

Fee and other income

 

 

151

 

 

 

217

 

 

 

234

 

 

 

411

 

Total revenues

 

 

91,488

 

 

 

93,529

 

 

 

278,431

 

 

 

283,084

 

Expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss and loss adjustment expenses incurred

 

 

44,325

 

 

 

47,598

 

 

 

142,807

 

 

 

152,836

 

Underwriting and certain other operating costs

 

 

6,736

 

 

 

8,011

 

 

 

21,704

 

 

 

23,842

 

Commissions

 

 

6,153

 

 

 

6,416

 

 

 

18,764

 

 

 

19,526

 

Salaries and benefits

 

 

6,396

 

 

 

6,179

 

 

 

19,202

 

 

 

18,786

 

Policyholder dividends

 

 

1,265

 

 

 

865

 

 

 

3,363

 

 

 

3,290

 

Total expenses

 

 

64,875

 

 

 

69,069

 

 

 

205,840

 

 

 

218,280

 

Income before income taxes

 

 

26,613

 

 

 

24,460

 

 

 

72,591

 

 

 

64,804

 

Income tax expense

 

 

5,227

 

 

 

4,759

 

 

 

13,915

 

 

 

11,978

 

Net income

 

$

21,386

 

 

$

19,701

 

 

$

58,676

 

 

$

52,826

 

Earnings per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$

1.11

 

 

$

1.03

 

 

$

3.05

 

 

$

2.75

 

Diluted

 

$

1.11

 

 

$

1.02

 

 

$

3.04

 

 

$

2.74

 

Shares used in computing earnings per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

19,256,069

 

 

 

19,216,545

 

 

 

19,243,689

 

 

 

19,204,196

 

Diluted

 

 

19,302,551

 

 

 

19,272,984

 

 

 

19,320,199

 

 

 

19,281,036

 

Cash dividends declared per common share

 

$

0.25

 

 

$

0.22

 

 

$

0.75

 

 

$

0.66

 

 

See accompanying notes.

5


AMERISAFE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(unaudited)

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Net income

 

$

21,386

 

 

$

19,701

 

 

$

58,676

 

 

$

52,826

 

Other comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized gain (loss) on debt securities, net of tax

 

 

2,475

 

 

 

(2,118

)

 

 

13,447

 

 

 

(7,813

)

Comprehensive income

 

$

23,861

 

 

$

17,583

 

 

$

72,123

 

 

$

45,013

 

 

See accompanying notes.

6


AMERISAFE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

Three Months Ended September 30, 2019 and 2018

(in thousands, except share data)

(unaudited)

 

 

 

 

Common Stock

 

 

Additional

Paid-In

 

 

Treasury Stock

 

 

Accumulated

 

 

Accumulated

Other

Comprehensive

 

 

 

 

 

 

 

Shares

 

 

Amounts

 

 

Capital

 

 

Shares

 

 

Amounts

 

 

Earnings

 

 

Income

 

 

Total

 

Balance at June 30, 2019

 

 

20,556,511

 

 

$

205

 

 

$

212,493

 

 

 

(1,258,250

)

 

$

(22,370

)

 

$

248,975

 

 

$

10,140

 

 

$

449,443

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

21,386

 

 

 

 

 

 

21,386

 

Other comprehensive

   income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in unrealized

   gains, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,475

 

 

 

2,475

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

23,861

 

Common stock issued

 

 

2,048

 

 

 

 

 

 

(1

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1

)

Share-based compensation

 

 

 

 

 

 

 

 

251

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

251

 

Dividends to shareholders

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,825

)

 

 

 

 

 

(4,825

)

Balance at September 30, 2019

 

 

20,558,559

 

 

$

205

 

 

$

212,743

 

 

 

(1,258,250

)

 

$

(22,370

)

 

$

265,536

 

 

$

12,615

 

 

$

468,729

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Additional

Paid-In

 

 

Treasury Stock

 

 

Accumulated

 

 

Accumulated

Other

Comprehensive

 

 

 

 

 

 

 

Shares

 

 

Amounts

 

 

Capital

 

 

Shares

 

 

Amounts

 

 

Earnings

 

 

Loss

 

 

Total

 

Balance at June 30, 2018

 

 

20,528,230

 

 

$

205

 

 

$

210,895

 

 

 

(1,258,250

)

 

$

(22,370

)

 

$

258,744

 

 

$

(2,083

)

 

$

445,391

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

19,701

 

 

 

 

 

 

19,701

 

Other comprehensive

   income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in unrealized

   losses, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,118

)

 

 

(2,118

)

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

17,583

 

Share-based compensation

 

 

 

 

 

 

 

 

261

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

261

 

Dividends to shareholders

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(4,239

)

 

 

 

 

 

(4,239

)

Balance at September 30, 2018

 

 

20,528,230

 

 

$

205

 

 

$

211,156

 

 

 

(1,258,250

)

 

$

(22,370

)

 

$

274,206

 

 

$

(4,201

)

 

$

458,996

 

 

See accompanying notes.

7


AMERISAFE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY

Nine Months Ended September 30, 2019 and 2018

(in thousands, except share data)

(unaudited)

 

 

 

Common Stock

 

 

Additional

Paid-In

 

 

Treasury Stock

 

 

Accumulated

 

 

Accumulated

Other

Comprehensive

 

 

 

 

 

 

 

Shares

 

 

Amounts

 

 

Capital

 

 

Shares

 

 

Amounts

 

 

Earnings

 

 

Income (Loss)

 

 

Total

 

Balance at December 31, 2018

 

 

20,528,230

 

 

$

205

 

 

$

211,431

 

 

 

(1,258,250

)

 

$

(22,370

)

 

$

221,328

 

 

$

(832

)

 

$

409,762

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impact of adoption of

   ASU 2016-02

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1

)

 

 

 

 

 

(1

)

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

58,676

 

 

 

 

 

 

58,676

 

Other comprehensive

   income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in unrealized

   losses, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

13,447

 

 

 

13,447

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

72,123

 

Common stock issued upon

   exercise of options

 

 

5,000

 

 

 

 

 

 

20

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

20

 

Common stock issued

 

 

25,329

 

 

 

 

 

 

559

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

559

 

Share-based compensation

 

 

 

 

 

 

 

 

733

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

733

 

Dividends to shareholders

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(14,467

)

 

 

 

 

 

(14,467

)

Balance at September 30, 2019

 

 

20,558,559

 

 

$

205

 

 

$

212,743

 

 

 

(1,258,250

)

 

$

(22,370

)

 

$

265,536

 

 

$

12,615

 

 

$

468,729

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Stock

 

 

Additional

Paid-In

 

 

Treasury Stock

 

 

Accumulated

 

 

Accumulated

Other

Comprehensive

 

 

 

 

 

 

 

Shares

 

 

Amounts

 

 

Capital

 

 

Shares

 

 

Amounts

 

 

Earnings

 

 

Income (Loss)

 

 

Total

 

Balance at December 31, 2017

 

 

20,504,165

 

 

 

204

 

 

 

210,081

 

 

 

(1,258,250

)

 

 

(22,370

)

 

 

233,896

 

 

 

3,612

 

 

 

425,423

 

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impact of adoption of

   ASU 2016-01

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

614

 

 

 

 

 

 

614

 

Impact of adoption of

   ASU 2018-02

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(414

)

 

 

 

 

 

(414

)

Net income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

52,826

 

 

 

 

 

 

52,826

 

Other comprehensive

   income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Change in unrealized

   gains, net of tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(7,813

)

 

 

(7,813

)

Comprehensive income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

45,013

 

Common stock issued upon

   exercise of options

 

 

15,000

 

 

 

 

 

 

67

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

67

 

Common stock issued

 

 

9,065

 

 

 

1

 

 

 

195

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

196

 

Share-based compensation

 

 

 

 

 

 

 

 

813

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

813

 

Dividends to shareholders

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(12,716

)

 

 

 

 

 

(12,716

)

Balance at September 30, 2018

 

 

20,528,230

 

 

$

205

 

 

$

211,156

 

 

 

(1,258,250

)

 

$

(22,370

)

 

$

274,206

 

 

$

(4,201

)

 

$

458,996

 

 

See accompanying notes.

8


AMERISAFE, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

 

 

Nine Months Ended September 30,

 

 

 

2019

 

 

2018

 

Operating activities

 

 

 

 

 

 

 

 

Net income

 

$

58,676

 

 

$

52,826

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Depreciation

 

 

684

 

 

 

748

 

Net amortization of investments

 

 

6,520

 

 

 

8,414

 

Deferred income taxes

 

 

(203

)

 

 

1,388

 

Net realized losses on investments

 

 

27

 

 

 

1,471

 

Net unrealized gains on equity securities

 

 

(3,165

)

 

 

(259

)

Net realized losses on disposal of assets

 

 

2

 

 

 

 

Share-based compensation

 

 

882

 

 

 

1,074

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Premiums receivable, net

 

 

(8,171

)

 

 

(4,391

)

Accrued interest receivable

 

 

(207

)

 

 

(141

)

Deferred policy acquisition costs

 

 

(607

)

 

 

(1,075

)

Amounts held by others

 

 

 

 

 

(7,855

)

Other assets

 

 

(949

)

 

 

2,692

 

Reserves for loss and loss adjustment expenses

 

 

(7,597

)

 

 

19,284

 

Unearned premiums

 

 

5,339

 

 

 

7,897

 

Reinsurance balances

 

 

9,140

 

 

 

(19,136

)

Amounts held for others and policyholder deposits

 

 

2,416

 

 

 

2,621

 

Accounts payable and other liabilities

 

 

(309

)

 

 

5,185

 

Net cash provided by operating activities

 

 

62,478

 

 

 

70,743

 

Investing activities

 

 

 

 

 

 

 

 

Purchases of investments held-to-maturity

 

 

(115,712

)

 

 

(71,872

)

Purchases of investments available-for-sale

 

 

(46,104

)

 

 

(82,519

)

Purchases of equity securities

 

 

(4,120

)

 

 

(5,251

)

Purchases of short-term investments

 

 

(79,224

)

 

 

(133,355

)

Proceeds from maturities of investments held-to-maturity

 

 

120,498

 

 

 

85,322

 

Proceeds from sales and maturities of investments available-for-sale

 

 

90,244

 

 

 

79,539

 

Proceeds from sales and maturities of short-term investments

 

 

73,039

 

 

 

48,965

 

Proceeds from redemptions of other investments

 

 

 

 

 

130

 

Purchases of property and equipment

 

 

(858

)

 

 

(1,083

)

Net cash provided by (used in) investing activities

 

 

37,763

 

 

 

(80,124

)

Financing activities

 

 

 

 

 

 

 

 

Proceeds from stock option exercises

 

 

20

 

 

 

67

 

Finance lease purchases

 

 

(35

)

 

 

 

Dividends to shareholders

 

 

(14,700

)

 

 

(12,921

)

Net cash used in financing activities

 

 

(14,715

)

 

 

(12,854

)

Change in cash and cash equivalents

 

 

85,526

 

 

 

(22,235

)

Cash and cash equivalents at beginning of period

 

 

40,344

 

 

 

55,559

 

Cash and cash equivalents at end of period

 

$

125,870

 

 

$

33,324

 

 

See accompanying notes.

9


AMERISAFE, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

 

 

Note 1. Basis of Presentation

AMERISAFE, Inc. (the “Company”) is an insurance holding company incorporated in the state of Texas. The accompanying unaudited consolidated financial statements include the accounts of AMERISAFE and its subsidiaries: American Interstate Insurance Company (“AIIC”) and its insurance subsidiaries, Silver Oak Casualty, Inc. (“SOCI”) and American Interstate Insurance Company of Texas (“AIICTX”), Amerisafe Risk Services, Inc. (“RISK”) and Amerisafe General Agency, Inc. (“AGAI”). AIIC and SOCI are property and casualty insurance companies organized under the laws of the state of Nebraska. AIICTX is a property and casualty insurance company organized under the laws of the state of Texas. RISK, a wholly owned subsidiary of the Company, is a claims and safety service company currently servicing only affiliated insurance companies. AGAI, a wholly owned subsidiary of the Company, is a general agent for the Company. AGAI sells insurance, which is underwritten by AIIC, SOCI and AIICTX, as well as by nonaffiliated insurance carriers. The assets and operations of AGAI are not significant to that of the Company and its consolidated subsidiaries.

The terms “AMERISAFE,” the “Company,” “we,” “us” or “our” refer to AMERISAFE, Inc. and its consolidated subsidiaries, as the context requires.

The Company provides workers’ compensation insurance for small to mid-sized employers engaged in hazardous industries, principally construction, trucking, logging and lumber, manufacturing, and agriculture. Assets and revenues of AIIC and its subsidiaries represent at least 95% of comparable consolidated amounts of the Company for each of the nine months ended September 30, 2019 and 2018.

In the opinion of management of the Company, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of normal recurring accruals) necessary to present fairly the financial position, the results of operations and cash flows for the periods presented. The unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q under the Securities Exchange Act of 1934 and therefore do not include all information and footnotes to be in conformity with accounting principles generally accepted in the United States (“GAAP”). The results for the interim periods are not necessarily indicative of the results of operations that may be expected for the year. The unaudited consolidated financial statements contained herein should be read in conjunction with our Annual Report on Form 10-K for the year ended December 31, 2018.

The preparation of financial statements in accordance with GAAP requires management to make estimates and assumptions that affect the reported amounts of our assets, liabilities, revenues and expenses and related disclosures.  Some of the estimates result from judgments that can be subjective and complex and, consequently, actual results in future periods might differ from these estimates.

Adopted Accounting Guidance

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842).  The new guidance requires a lessee to recognize a lease liability and a right of use asset for all leases extending beyond twelve months.  This standard was effective for us beginning in the first quarter of 2019. We elected the new transition method under the transition guidance within the new standard. Therefore, prior comparative periods are not adjusted.  We also elected the package of practical expedients, which among other things, allows us to carryforward the historical lease classification.  We made an accounting policy election not to recognize lease assets and lease liabilities for short-term operating leases. Adoption of the new guidance resulted in the Company recognizing right-of-use assets of $0.4 million and lease liabilities of $0.3 million. The cumulative effect adjustment to the opening balance of retained earnings was minimal. Adoption of this new guidance did not have a material effect on the Company’s consolidated financial statements as the Company does not have any significant leases.  

 

Prospective Accounting Guidance

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses.  The current guidance delays the recognition of credit losses until a probable loss has occurred.  The new guidance requires credit losses for securities measured at amortized cost to be determined using current expected credit loss estimates.  These estimates are to be derived from historical, current and reasonable supporting forecasts, including prepayments and estimates, and will be recorded through a valuation account.  The same method will be used for available-for-sale securities, but the valuation account will be limited to the amount by which the fair value is below amortized cost.  The standard is effective for us in the first quarter of 2020.  Implementation of the new guidance requires a modified retrospective approach without restatement, which means the first cumulative adjustment required will be a charge to retained earnings, with subsequent changes in the valuation account reported in the income statement.  The financial statement impact will be determined by the nature of the portfolio held and the economic conditions at the time of implementation.

 

10


In establishing a current expected credit allowance for held-to-maturity fixed income securities under the new accounting standard, the Company will use a probability of default and loss given default methodology based on the securities credit rating and maturity date of the specific security.  The amount is currently estimated to be in the range of $250,000 to $400,000.  This estimated amount will change depending on the amount of held-to-maturity fixed income securities, the credit ratings and maturity dates of those securities, at the time of implementation of the new current expected credit loss accounting standard.

 

In establishing a current expected credit allowance for reinsurance recoverables under the new accounting standard, the Company will use a probability of default and loss given default methodology based on the credit ratings of our reinsurers.  The amount is currently estimated to be in the range of $400,000 to $600,000.  This estimated amount will change depending on the amount of reinsurance recoverables and the ratings of our reinsurers at the time of implementation of the new current expected credit loss accounting standard.

The Company’s internal working group has evaluated the remainder of the balance sheet assets, including available-for-sale securities and net premiums receivable, and determined the implementation of the new credit loss guidance in relation to those assets will have an immaterial impact on the financial statements.  

The estimated impacts could change based upon economic changes, events or conditions.  The Company will continue to monitor and evaluate the financial impact as the implementation date approaches.  

All other issued but not yet effective accounting and reporting standards as of September 30, 2019 are either not applicable to the Company or are not expected to have a material impact on the Company.

 

 

Note 2. Stock Options and Restricted Stock

As of September 30, 2019, the Company has two equity incentive plans: the AMERISAFE Non-Employee Director Restricted Stock Plan (the “Restricted Stock Plan”) and the AMERISAFE 2012 Equity and Incentive Compensation Plan (the “2012 Incentive Plan”). In connection with the approval of the 2012 Incentive Plan by the Company’s shareholders, no further grants were made under the AMERISAFE 2005 Incentive Plan.  There are no outstanding options or restricted stock awards under the 2005 Incentive Plan. See Note 12 to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2018 for additional information regarding the Company’s incentive plans.

During the nine months ended September 30, 2019, the Company issued 9,391 shares of common stock pursuant to vested performance awards, 11,048 shares of restricted common stock to officers, and 4,890 shares of restricted common stock to non-employee directors.  The market value of these shares totaled $1.5 million.  During the nine months ended September 30, 2018, the Company issued 3,304 shares of common stock pursuant to vested performance awards to executive officers and 5,761 shares of restricted common stock to non-employee directors. The market value of these shares totaled $0.5 million.

During the nine months ended September 30, 2019 and 2018, options to purchase 5,000 and 15,000 shares of common stock were exercised, respectively. In connection with these exercises, the Company received $19.8 thousand of stock option proceeds in the current year and $66.9 thousand of stock option proceeds in the same period of 2018.  The Company had no stock options outstanding as of September 30, 2019.

The Company recognized share-based compensation expense of $0.4 million in the quarter ended September 30, 2019 and $0.3 million for the same period in 2018.  The Company recognized share-based compensation expense of $0.9 million in the nine months ended September 30, 2019 and $1.1 million for the same period in 2018.  

 

 

Note 3. Earnings Per Share

The Company computes earnings per share (“EPS”) in accordance with FASB Accounting Standards Codification (“ASC”) Topic 260, Earnings Per Share. The Company has no participating unvested common shares which contain nonforfeitable rights to dividends and applies the treasury stock method in computing basic and diluted earnings per share.

Basic EPS is calculated by dividing net income by the weighted-average number of common shares outstanding during the period.

11


The diluted EPS calculation includes potential common shares assumed issued under the treasury stock method, which reflects the potential dilution that would occur if any outstanding options were exercised or restricted stock becomes vested.

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

 

(in thousands, except share and per share amounts)

 

Basic EPS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

21,386

 

 

$

19,701

 

 

$

58,676

 

 

$

52,826

 

Basic weighted average common shares

 

 

19,256,069

 

 

 

19,216,545

 

 

 

19,243,689

 

 

 

19,204,196

 

Basic earnings per common share

 

$

1.11

 

 

$

1.03

 

 

$

3.05

 

 

$

2.75

 

Diluted EPS:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

21,386

 

 

$

19,701

 

 

$

58,676

 

 

$

52,826

 

Diluted weighted average common shares:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares

 

 

19,256,069

 

 

 

19,216,545

 

 

 

19,243,689

 

 

 

19,204,196

 

Stock options and restricted stock

 

 

46,482

 

 

 

56,439

 

 

 

76,510

 

 

 

76,840

 

Diluted weighted average common shares

 

 

19,302,551

 

 

 

19,272,984

 

 

 

19,320,199

 

 

 

19,281,036

 

Diluted earnings per common share

 

$

1.11

 

 

$

1.02

 

 

$

3.04

 

 

$

2.74

 

 

 

Note 4. Investments

The gross unrealized gains and losses on, and the amortized cost and fair value of, those investments classified as held-to-maturity at September 30, 2019 are summarized as follows:

 

 

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair

Value

 

 

 

(in thousands)

 

States and political subdivisions

 

$

438,055

 

 

$

19,978

 

 

$

(3

)

 

$

458,030

 

Corporate bonds

 

 

115,982

 

 

 

1,587

 

 

 

(108

)

 

 

117,461

 

U.S. agency-based mortgage-backed securities

 

 

11,910

 

 

 

607

 

 

 

(1

)

 

 

12,516

 

U.S. Treasury securities and obligations of U.S.

   government agencies

 

 

37,513

 

 

 

406

 

 

 

(21

)

 

 

37,898

 

Asset-backed securities

 

 

701

 

 

 

1

 

 

 

(4

)

 

 

698

 

Totals

 

$

604,161

 

 

$

22,579

 

 

$

(137

)

 

$

626,603

 

 

The gross unrealized gains and losses on, and the amortized cost and fair value of, those investments classified as available-for-sale at September 30, 2019 are summarized as follows:

 

 

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair

Value

 

 

 

(in thousands)

 

States and political subdivisions

 

$

217,944

 

 

$

12,249

 

 

$

(2

)

 

$

230,191

 

Corporate bonds

 

 

142,011

 

 

 

3,417

 

 

 

(7

)

 

 

145,421

 

U.S. agency-based mortgage-backed securities

 

 

24,458

 

 

 

20

 

 

 

(55

)

 

 

24,423

 

U.S. Treasury securities and obligations

   of U.S. government agencies

 

 

39,857

 

 

 

406

 

 

 

(81

)

 

 

40,182

 

Totals

 

$

424,270

 

 

$

16,092

 

 

$

(145

)

 

$

440,217

 

 

The gross unrealized gains and losses on, and the cost of equity securities at September 30, 2019 are summarized as follows:

 

 

 

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair

Value

 

 

 

(in thousands)

 

Equity securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Domestic common stock

 

$

24,082

 

 

$

1,854

 

 

$

 

 

$

25,936

 

Total equity securities

 

$

24,082

 

 

$

1,854

 

 

$

 

 

$

25,936

 

12


 

The gross unrealized gains and losses on, and the amortized cost and fair value of, those investments classified as held-to-maturity at December 31, 2018 are summarized as follows:

 

 

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair

Value

 

 

 

(in thousands)

 

States and political subdivisions

 

$

445,922

 

 

$

5,109

 

 

$

(2,084

)

 

$

448,947

 

Corporate bonds

 

 

91,762

 

 

 

62

 

 

 

(455

)

 

 

91,369

 

U.S. agency-based mortgage-backed securities

 

 

8,102

 

 

 

327

 

 

 

(80

)

 

 

8,349

 

U.S. Treasury securities and obligations

   of U.S. government agencies

 

 

67,042

 

 

 

340

 

 

 

(339

)

 

 

67,043

 

Asset-backed securities

 

 

1,050

 

 

 

22

 

 

 

(8

)

 

 

1,064

 

Totals

 

$

613,878

 

 

$

5,860

 

 

$

(2,966

)

 

$

616,772

 

 

The gross unrealized gains and losses on, and the amortized cost and fair value of, those investments classified as available-for-sale at December 31, 2018 are summarized as follows:

 

 

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair

Value

 

 

 

(in thousands)

 

States and political subdivisions

 

$

231,848

 

 

$

3,515

 

 

$

(2,118

)

 

$

233,245

 

Corporate bonds

 

 

173,904

 

 

 

243

 

 

 

(933

)

 

 

173,214

 

U.S. agency-based mortgage-backed securities

 

 

12,835

 

 

 

 

 

 

(320

)

 

 

12,515

 

U.S. Treasury securities and obligations

   of U.S. government agencies

 

 

61,185

 

 

 

 

 

 

(1,429

)

 

 

59,756

 

Totals

 

$

479,772

 

 

$

3,758

 

 

$

(4,800

)

 

$

478,730

 

 

The gross unrealized gains and losses on, and the cost of equity securities at December 31, 2018 are summarized as follows:

 

 

 

Cost

 

 

Gross

Gains

 

 

Gross

Losses

 

 

Fair

Value

 

 

 

(in thousands)

 

Equity securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Domestic common stock

 

$

19,962

 

 

$

30

 

 

$

(1,341

)

 

$

18,651

 

Total equity securities

 

$

19,962

 

 

$

30

 

 

$

(1,341

)

 

$

18,651

 

 

A summary of the amortized cost and fair value of investments in fixed maturity securities, classified as held-to-maturity at September 30, 2019, by contractual maturity, is as follows:

 

 

 

Amortized

Cost

 

 

Fair

Value

 

 

 

(in thousands)

 

Maturity:

 

 

 

 

 

 

 

 

Within one year

 

$

60,720

 

 

$

61,141

 

After one year through five years

 

 

207,941

 

 

 

211,604

 

After five years through ten years

 

 

101,986

 

 

 

105,588

 

After ten years

 

 

220,903

 

 

 

235,056

 

U.S. agency-based mortgage-backed securities

 

 

11,910

 

 

 

12,516

 

Asset-backed securities

 

 

701

 

 

 

698

 

Totals

 

$

604,161

 

 

$

626,603

 

 

13


A summary of the amortized cost and fair value of investments in fixed maturity securities, classified as available-for-sale at September 30, 2019, by contractual maturity, is as follows:

 

 

 

Amortized

Cost

 

 

Fair

Value

 

 

 

(in thousands)

 

Maturity:

 

 

 

 

 

 

 

 

Within one year

 

$

38,130

 

 

$

38,207

 

After one year through five years

 

 

137,900

 

 

 

140,142

 

After five years through ten years

 

 

45,985

 

 

 

48,358

 

After ten years

 

 

177,797

 

 

 

189,087

 

U.S. agency-based mortgage-backed securities

 

 

24,458

 

 

 

24,423

 

Totals

 

$

424,270

 

 

$

440,217

 

 

The following table summarizes the fair value and gross unrealized losses on securities, aggregated by major investment category and length of time that the individual securities have been in a continuous unrealized loss position:

 

 

 

Less Than 12 Months

 

 

12 Months or Greater

 

 

Total

 

 

 

Fair Value of

Investments

with

Unrealized

Losses

 

 

Gross

Unrealized

Losses

 

 

Fair Value of

Investments

with

Unrealized

Losses

 

 

Gross

Unrealized

Losses

 

 

Fair Value of

Investments

with

Unrealized

Losses

 

 

Gross

Unrealized

Losses

 

 

 

(in thousands)

 

September 30, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Held-to-Maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed maturity securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

States and political subdivisions

 

$

4,277

 

 

$

3

 

 

$

 

 

$

 

 

$

4,277

 

 

$

3

 

Corporate bonds

 

 

13,241

 

 

 

67

 

 

 

8,208

 

 

 

41

 

 

 

21,449

 

 

 

108

 

U.S. agency-based mortgage-backed securities

 

 

404

 

 

 

1

 

 

 

 

 

 

 

 

 

404

 

 

 

1

 

U.S. Treasury securities and obligations

   of U.S. government agencies

 

 

 

 

 

 

 

 

3,236

 

 

 

21

 

 

 

3,236

 

 

 

21

 

Asset-backed securities

 

 

363

 

 

 

1

 

 

 

169

 

 

 

3

 

 

 

532

 

 

 

4

 

Total held-to-maturity securities

 

 

18,285

 

 

 

72

 

 

 

11,613

 

 

 

65

 

 

 

29,898

 

 

 

137

 

Available-for-Sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed maturity securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

States and political subdivisions

 

$

4,189

 

 

$

2

 

 

$

 

 

$

 

 

$

4,189

 

 

$

2

 

Corporate bonds

 

 

 

 

 

 

 

 

7,093

 

 

 

7

 

 

 

7,093

 

 

 

7

 

U.S. agency-based mortgage-backed securities

 

 

13,194

 

 

 

35

 

 

 

3,928

 

 

 

20

 

 

 

17,122

 

 

 

55

 

U.S. Treasury securities and obligations

   of U.S. government agencies

 

 

1,008

 

 

 

2

 

 

 

17,048

 

 

 

79

 

 

 

18,056

 

 

 

81

 

Total available-for-sale securities

 

 

18,391

 

 

 

39

 

 

 

28,069

 

 

 

106

 

 

 

46,460

 

 

 

145

 

Total

 

$

36,676

 

 

$

111

 

 

$

39,682

 

 

$

171

 

 

$

76,358

 

 

$

282

 

14


 

 

 

Less Than 12 Months

 

 

12 Months or Greater

 

 

Total

 

 

 

Fair Value of

Investments

with

Unrealized

Losses

 

 

Gross

Unrealized

Losses

 

 

Fair Value of

Investments

with

Unrealized

Losses

 

 

Gross

Unrealized

Losses

 

 

Fair Value of

Investments

with

Unrealized

Losses

 

 

Gross

Unrealized

Losses

 

 

 

(in thousands)

 

December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Held-to-Maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed maturity securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

States and political subdivisions

 

$

28,369

 

 

$

59

 

 

$

180,550

 

 

$

2,025

 

 

$

208,919

 

 

$

2,084

 

Corporate bonds

 

 

17,448

 

 

 

36

 

 

 

48,315

 

 

 

419

 

 

 

65,763

 

 

 

455

 

U.S. agency-based mortgage-backed securities

 

 

 

 

 

 

 

 

2,287

 

 

 

80

 

 

 

2,287

 

 

 

80

 

U.S. Treasury securities and obligations

   of U.S. government agencies

 

 

2,865

 

 

 

4

 

 

 

46,486

 

 

 

335

 

 

 

49,351

 

 

 

339

 

Asset-backed securities

 

 

 

 

 

 

 

 

525

 

 

 

8

 

 

 

525

 

 

 

8

 

Total held-to-maturity securities

 

 

48,682

 

 

 

99

 

 

 

278,163

 

 

 

2,867

 

 

 

326,845

 

 

 

2,966

 

Available-for-Sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed maturity securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

States and political subdivisions

 

$

16,109

 

 

$

81

 

 

$

76,255

 

 

$

2,037

 

 

$

92,364

 

 

$

2,118

 

Corporate bonds

 

 

59,099

 

 

 

279

 

 

 

70,306

 

 

 

654

 

 

 

129,405

 

 

 

933

 

U.S. agency-based mortgage-backed securities

 

 

 

 

 

 

 

 

12,515

 

 

 

320

 

 

 

12,515

 

 

 

320

 

U.S. Treasury securities and obligations

   of U.S. government agencies

 

 

 

 

 

 

 

 

59,756

 

 

 

1,429

 

 

 

59,756

 

 

 

1,429

 

Total available-for-sale securities

 

 

75,208

 

 

 

360

 

 

 

218,832

 

 

 

4,440

 

 

 

294,040

 

 

 

4,800

 

Total

 

$

123,890

 

 

$

459

 

 

$

496,995

 

 

$

7,307

 

 

$

620,885

 

 

$

7,766

 

 

At September 30, 2019, we held 43 individual fixed maturity securities that were in an unrealized loss position, of which 21 individual fixed maturity securities were in a continuous unrealized loss position for longer than 12 months.

During the third quarter of 2019, we recognized through income $0.4 million of net unrealized gains on equity securities held as of September 30, 2019.  During the third quarter of 2018, we recognized through income $0.6 million of net unrealized gains on equity securities held as of September 30, 2018.  

During the nine months ended September 30, 2019, we recognized through income $3.2 million of net unrealized gains on equity securities held as of September 30, 2019.  During the nine months ended September 30, 2018, we recognized through income $0.3 million of net unrealized gains on equity securities held as of September 30, 2018.

Investment income is recognized as it is earned. The discount or premium on fixed maturity securities is amortized using the “constant yield” method. Anticipated prepayments, where applicable, are considered when determining the amortization of premiums or discounts. Realized investment gains and losses are determined using the specific identification method.

We regularly review our investment portfolio to evaluate the existence of other-than-temporary declines in the fair value of investments. We consider various factors in determining if a decline in the fair value of an individual security is other-than-temporary. The key factors we consider are:

 

any reduction or elimination of preferred dividends, or nonpayment of scheduled principal or interest payments;

 

the financial condition and near-term prospects of the issuer of the applicable security, including any specific events that may affect its operations or earnings;

 

how long and by how much the fair value of the security has been below its cost or amortized cost;

 

any downgrades of the security by a rating agency;

 

our intent not to sell the security for a sufficient time period for it to recover its value;

 

the likelihood of being required to sell the security before the recovery of its value; and

 

an evaluation as to whether there are any credit losses on debt securities.

15


We reviewed all securities with unrealized losses in accordance with the impairment policy described above. We determined that the unrealized losses in the fixed maturity securities portfolio related primarily to changes in market interest rates since the date of purchase, current conditions in the capital markets and the impact of those conditions on market liquidity and prices generally. We expect to recover the carrying value of these securities as it is not more likely than not that we will be required to sell the securities before the recovery of its amortized cost basis.

During the three and nine months ended September 30, 2019 and 2018, there were no impairment losses recognized for other-than-temporary declines in the fair value of our investments.

Net realized losses in the quarter ended September 30, 2019 were immaterial.  Net realized losses in the quarter ended September 30, 2018 were $0.3 million resulting from called fixed maturity securities.

Net realized losses in the nine months ended September 30, 2019 were immaterial.  Net realized losses in the nine months ended September 30, 2018 were $1.5 million resulting from the sale of equity and fixed maturity securities classified as available-for-sale and called fixed maturity securities.

 

 

Note 5. Income Taxes

In accordance with FASB ASC Topic 740, “Income Taxes,” we provide for the recognition and measurement of deferred income tax benefits based on the likelihood of their realization in future years. As of September 30, 2019, the Company had a valuation allowance of $0.2 million against its deferred income tax benefits.  

The Company recognizes interest and penalties related to uncertain tax positions in income tax expense. There were no uncertain tax positions recognized for the periods ended September 30, 2019 and 2018.

Tax years 2015 through 2018 are subject to examination by the federal and state taxing authorities.

 

 

Note 6. Loss Reserves

 

We record reserves for estimated losses under insurance policies that we write and for loss adjustment expenses related to the investigation and settlement of policy claims. Our reserves for loss and loss adjustment expenses represent the estimated cost of all reported and unreported loss and loss adjustment expenses incurred and unpaid as of a given point in time.  The reserves for loss and loss adjustment expenses are estimated using individual case-basis valuations, statistical analyses and estimates based upon experience for unreported claims and their associated loss and loss adjustment expenses. Such estimates may be more or less than the amounts ultimately paid when the claims are settled. The estimates are subject to the effects of trends in loss severity and frequency. Although considerable variability is inherent in these estimates, management believes that the reserves for loss and loss adjustment expenses are adequate. The estimates are continually reviewed internally and periodically evaluated with our independent actuary.  Adjustments are made as experience develops and new information becomes known.  Any such adjustments are included in income from current operations.  See Note 9 to our consolidated financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2018 for additional information regarding the Company’s loss and loss adjustment expense development.

 

16


The following table provides the Company’s liability for unpaid loss and loss adjustment expenses, net of related amounts recoverable from reinsurers, for the nine months ended September 30, 2019 and 2018:

 

 

 

Nine Months Ended September 30,

 

 

 

2019

 

 

2018

 

 

 

(in thousands)

 

Balance, beginning of period

 

$

798,409

 

 

$

771,845

 

Less amounts recoverable from reinsurers

   on unpaid loss and loss adjustment expenses

 

 

107,216

 

 

 

84,889

 

Net balance, beginning of period

 

 

691,193

 

 

 

686,956

 

Add incurred related to:

 

 

 

 

 

 

 

 

Current accident year

 

 

181,693

 

 

 

186,964

 

Prior accident years

 

 

(38,886

)

 

 

(34,128

)

Total incurred

 

 

142,807

 

 

 

152,836

 

Less paid related to:

 

 

 

 

 

 

 

 

Current accident year

 

 

35,512

 

 

 

37,901

 

Prior accident years

 

 

105,590

 

 

 

115,194

 

Total paid

 

 

141,102

 

 

 

153,095

 

Net balance, end of period

 

 

692,898

 

 

 

686,697

 

Add amounts recoverable from reinsurers

   on unpaid loss and loss adjustment expenses

 

 

97,914

 

 

 

104,432

 

Balance, end of period

 

$

790,812

 

 

$

791,129

 

 

The foregoing reconciliation reflects favorable development of the net reserves at September 30, 2019 and September 30, 2018. The favorable development reduced loss and loss adjustment expenses incurred by $38.9 million and $34.1 million in 2019 and 2018, respectively. The revisions to the Company’s reserves reflect new information gained by claims adjusters in the normal course of adjusting claims and is reflected in the financial statements when the information becomes available. It is typical for more serious claims to take several years or longer to settle and the Company continually revises estimates as more information about claimants’ medical conditions and potential disability becomes known and the claims get closer to being settled.  Multiple factors can cause loss development both unfavorable and favorable. The favorable loss development we experienced across accident years was largely due to favorable case reserve development from closed claims and claims where the worker had reached maximum medical improvement.

 

 

Note 7. Comprehensive Income and Accumulated Other Comprehensive Income

Comprehensive income was $23.9 million for the three months ended September 30, 2019, compared to $17.6 million for the three months ended September 30, 2018.  Comprehensive income was $72.1 million for the nine months ended September 30, 2019, compared to $45.0 million for the same period in 2018.  The difference between net income as reported and comprehensive income was due to changes in unrealized gains and losses, net of tax on available-for-sale debt securities.

Comprehensive income includes net income plus unrealized gains (losses) on our available-for-sale investment securities, net of tax. In reporting comprehensive income on a net basis in the statements of comprehensive income, we used a 21 percent tax rate in 2019 and 2018. The following table illustrates the changes in the balance of each component of accumulated other comprehensive income for each period presented in the interim financial statements.

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

 

(in thousands)

 

Balance, beginning of period

 

$

10,140

 

 

$

(2,083

)

 

$

(832

)

 

$

3,612

 

Other comprehensive income (loss) before

   reclassification

 

 

2,467

 

 

 

(2,143

)

 

 

12,844

 

 

 

(7,964

)

Amounts reclassified from accumulated other

   comprehensive income

 

 

8

 

 

 

25

 

 

 

603

 

 

 

151

 

Net current period other comprehensive

   income (loss)

 

 

2,475

 

 

 

(2,118

)

 

 

13,447

 

 

 

(7,813

)

Balance, end of period

 

$

12,615

 

 

$

(4,201

)

 

$

12,615

 

 

$

(4,201

)

 

17


The sale or other-than-temporary impairment of an available-for-sale security results in amounts being reclassified from accumulated other comprehensive income to current period net income. The effects of reclassifications out of accumulated other comprehensive income by the respective line items of net income are presented in the following table.

 

Component of Accumulated Other

 

Three Months Ended

 

 

Nine Months Ended

 

 

Affected line item in the

Comprehensive Income

 

September 30,

 

 

September 30,

 

 

statement of income

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

 

 

 

(in thousands)

 

 

 

Unrealized losses on

   available-for-sale securities

 

$

(10

)

 

$

(32

)

 

$

(764

)

 

$

(445

)

 

Net realized losses on

   investments

 

 

 

(10

)

 

 

(32

)

 

 

(764

)

 

 

(445

)

 

Income before income taxes

 

 

 

2

 

 

 

7

 

 

 

161

 

 

 

40

 

 

Income tax expense

 

 

$

(8

)

 

$

(25

)

 

$

(603

)

 

$

(405

)

 

Net income

 

 

Note 8. Fair Value Measurements

The Company carries available-for-sale securities at fair value in our consolidated financial statements and determines fair value measurements and disclosure in accordance with FASB ASC Topic 820, Fair Value Measurements and Disclosures.

The Company determines the fair values of its financial instruments based on the fair value hierarchy established in ASC Topic 820, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The standard defines fair value, describes three levels of inputs that may be used to measure fair value, and expands disclosures about fair value measurements.

Fair value is defined in ASC Topic 820 as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Fair value is the price to sell an asset or transfer a liability and, therefore, represents an exit price, not an entry price. Fair value is the exit price in the principal market (or, if lacking a principal market, the most advantageous market) in which the reporting entity would transact. Fair value is a market-based measurement, not an entity-specific measurement, and, as such, is determined based on the assumptions that market participants would use in pricing the asset or liability. The exit price objective of a fair value measurement applies regardless of the reporting entity’s intent and/or ability to sell the asset or transfer the liability at the measurement date.

ASC Topic 820 requires the use of valuation techniques that are consistent with the market approach, the income approach and/or the cost approach. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets and liabilities. The income approach uses valuation techniques to convert future amounts, such as cash flows or earnings, to a single present value amount on a discounted basis. The cost approach is based on the amount that currently would be required to replace the service capacity of an asset, also known as current replacement cost. Valuation techniques used to measure fair value are to be consistently applied.

In ASC Topic 820, inputs refer broadly to the assumptions that market participants would use in pricing the asset or liability, including assumptions about risk, for example, the risk inherent in a particular valuation technique used to measure fair value (such as a pricing model) and/or the risk inherent in the inputs to the valuation technique. Inputs may be observable or unobservable:

 

Observable inputs are inputs that reflect the assumptions market participants would use in pricing the asset or liability developed based on market data obtained from sources independent of the reporting entity.

 

Unobservable inputs are inputs that reflect the reporting entity’s own assumptions about the assumptions market participants would use in pricing the asset or liability developed based on the best information available in the circumstances.

18


Valuation techniques used to measure fair value are intended to maximize the use of observable inputs and minimize the use of unobservable inputs. ASC Topic 820 establishes a fair value hierarchy that prioritizes the use of inputs used in valuation techniques into the following three levels:

 

Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date.

 

Level 2 inputs are inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability, or inputs that are derived principally from or corroborated by observable market data.

 

Level 3 inputs are unobservable inputs for the asset or liability. Unobservable inputs are to be used to measure fair value to the extent that observable inputs are not available, thereby allowing for situations in which there is little, if any, market activity for the asset or liability at the measurement date.

In general, fair value is based upon quoted market prices, where available. If such quoted market prices are not available, fair value is based upon internally developed models that primarily use, as inputs, observable market-based parameters.

The fair values of the Company’s investments are based upon prices provided by an independent pricing service. The Company has reviewed these prices for reasonableness and has not adjusted any prices received from the independent provider. Securities reported at fair value utilizing Level 1 inputs represent assets whose fair value is determined based upon observable unadjusted quoted market prices for identical assets in active markets. Level 2 securities represent assets whose fair value is determined using observable market information such as previous day trade prices, quotes from less active markets or quoted prices of securities with similar characteristics. There were no transfers between Level 1 and Level 2 during the nine months ended September 30, 2019.

At September 30, 2019, assets measured at fair value on a recurring basis are summarized below:

 

 

 

September 30, 2019

 

 

 

Level 1

Inputs

 

 

Level 2

Inputs

 

 

Level 3

Inputs

 

 

Total Fair

Value

 

 

 

(in thousands)

 

Financial instruments carried at fair value, classified as a part of:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities available-for-sale—fixed maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

States and political subdivisions

 

$

 

 

$

230,191

 

 

$

 

 

$

230,191

 

Corporate bonds

 

 

 

 

 

145,421

 

 

 

 

 

 

145,421

 

U.S. agency-based mortgage-backed securities

 

 

 

 

 

24,423

 

 

 

 

 

 

24,423

 

U.S. Treasury securities

 

 

40,182

 

 

 

 

 

 

 

 

 

40,182

 

Total securities available-for-sale—fixed maturity

 

 

40,182

 

 

 

400,035

 

 

 

 

 

 

440,217

 

Equity securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Domestic common stock

 

 

25,936

 

 

 

 

 

 

 

 

 

25,936

 

Total

 

$

66,118

 

 

$

400,035

 

 

$

 

 

$

466,153

 

 

At September 30, 2019, assets measured at amortized cost are summarized below:

 

 

 

September 30, 2019

 

 

 

Level 1

Inputs

 

 

Level 2

Inputs

 

 

Level 3

Inputs

 

 

Total Fair

Value

 

 

 

(in thousands)

 

Securities held-to-maturity—fixed maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

States and political subdivisions

 

$

 

 

$

458,030

 

 

$

 

 

$

458,030

 

Corporate bonds

 

 

 

 

 

117,461

 

 

 

 

 

 

117,461

 

U.S. agency-based mortgage-backed securities

 

 

 

 

 

12,516

 

 

 

 

 

 

12,516

 

U.S. Treasury securities

 

 

7,891

 

 

 

 

 

 

 

 

 

7,891

 

Obligations of U.S. government agencies

 

 

 

 

 

30,007

 

 

 

 

 

 

30,007

 

Asset-backed securities

 

 

 

 

 

698

 

 

 

 

 

 

698

 

Total held-to-maturity

 

$

7,891

 

 

$

618,712

 

 

$

 

 

$

626,603

 

 

19


At December 31, 2018, assets measured at fair value on a recurring basis are summarized below:

 

 

 

December 31, 2018

 

 

 

Level 1

Inputs

 

 

Level 2

Inputs

 

 

Level 3

Inputs

 

 

Total Fair

Value

 

 

 

(in thousands)

 

Financial instruments carried at fair value, classified as part of:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities available-for-sale—fixed maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

States and political subdivisions

 

$

 

 

$

233,245

 

 

$

 

 

$

233,245

 

Corporate bonds

 

 

 

 

 

173,214

 

 

 

 

 

 

173,214

 

U.S. agency-based mortgage-backed securities

 

 

 

 

 

12,515

 

 

 

 

 

 

12,515

 

U.S. Treasury securities and obligations

   of U.S. government agencies

 

 

59,756

 

 

 

 

 

 

 

 

 

59,756

 

Total securities available-for-sale—fixed maturity

 

$

59,756

 

 

$

418,974

 

 

$

 

 

$

478,730

 

Equity securities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Domestic common stock

 

 

18,651

 

 

 

 

 

 

 

 

 

18,651

 

Total

 

$

78,407

 

 

$

418,974

 

 

$

 

 

$

497,381

 

 

 

At December 31, 2018, assets measured at amortized cost are summarized below:

 

 

 

December 31, 2018

 

 

 

Level 1

Inputs

 

 

Level 2

Inputs

 

 

Level 3

Inputs

 

 

Total Fair

Value

 

 

 

(in thousands)

 

Securities held-to-maturity—fixed maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

States and political subdivisions

 

$

 

 

$

448,947

 

 

$

 

 

$

448,947

 

Corporate bonds

 

 

 

 

 

91,369

 

 

 

 

 

 

91,369

 

U.S. agency-based mortgage-backed securities

 

 

 

 

 

8,349

 

 

 

 

 

 

8,349

 

U.S. Treasury securities

 

 

7,111

 

 

 

 

 

 

 

 

 

7,111

 

Obligations of U.S. government agencies

 

 

 

 

 

59,932

 

 

 

 

 

 

59,932

 

Asset-backed securities

 

 

 

 

 

1,064

 

 

 

 

 

 

1,064

 

Total held-to-maturity

 

$

7,111

 

 

$

609,661

 

 

$

 

 

$

616,772

 

 

The Company determines fair value amounts for financial instruments using available third-party market information. When such information is not available, the Company determines the fair value amounts using appropriate valuation methodologies. Nonfinancial instruments such as real estate, property and equipment, deferred policy acquisition costs, deferred income taxes and loss and loss adjustment expense reserves are excluded from the fair value disclosure.

 

At September 30, 2019, the Company did not hold any securities measured at fair value on a nonrecurring basis due to impairment.

Cash and Cash Equivalents —The carrying amounts reported in the accompanying consolidated balance sheets for these financial instruments approximate their fair values, which are characterized as Level 1 assets.

Investments —The fair values for fixed maturity and equity securities are based on prices obtained from an independent pricing service. Equity and treasury securities are characterized as Level 1 assets, as their fair values are based on quoted prices in active markets. Fixed maturity securities, other than treasury securities, are characterized as Level 2 assets, as their fair values are determined using observable market inputs.

Short Term Investments —The carrying amounts reported in the accompanying consolidated balance sheets for these financial instruments approximate their fair values. These securities are characterized as Level 2 assets in the fair value hierarchy.

20


The following table summarizes the carrying values and corresponding fair values for financial instruments:

 

 

 

As of  September 30, 2019

 

 

As of  December 31, 2018

 

 

 

Carrying

Amount

 

 

Fair

Value

 

 

Carrying

Amount

 

 

Fair

Value

 

 

 

(in thousands)

 

Assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed maturity securities—held-to-maturity

 

$

604,161

 

 

$

626,603

 

 

$

613,878

 

 

$

616,772

 

Fixed maturity securities—available-for-sale

 

 

440,217

 

 

 

440,217

 

 

 

478,730

 

 

 

478,730

 

Equity securities

 

 

25,936

 

 

 

25,936

 

 

 

18,651

 

 

 

18,651

 

Short-term investments

 

 

20,964

 

 

 

20,964

 

 

 

14,231

 

 

 

14,231

 

Cash and cash equivalents

 

 

125,870

 

 

 

125,870

 

 

 

40,344

 

 

 

40,344

 

 

 

Note 9. Treasury Stock

The Company’s Board of Directors initiated a share repurchase program in February 2010. In October 2016, the Board reauthorized this program with a limit of $25.0 million with no expiration date.  There were no shares repurchased under this program in the nine months ended September 30, 2019 and 2018.

 

Note 10. Leases

The Company has operating and finance leases for office space and equipment.  Our leases have remaining lease terms of four months to 52 months, some of which include options to extend the leases for up to five years.  The Company, in determining the present value of lease payments, utilizes either the rate implicit in the lease if that rate is readily determinable or the Company’s incremental secured borrowing rate commensurate with the term of the underlying lease.

Supplemental balance sheet information related to leases is as follows:

 

 

 

September 30, 2019

 

 

Balance Sheet Classification

 

 

(in thousands)

 

 

 

Operating leases:

 

 

 

 

 

 

Operating lease right-of-use assets

 

$

469

 

 

Other assets

 

 

 

 

 

 

 

Operating lease liabilities

 

$

469

 

 

Accounts payable and other liabilities

 

 

 

 

 

 

 

Finance leases:

 

 

 

 

 

 

Finance lease right-of-use assets

 

$

185

 

 

 

Finance lease accumulated amortization

   right-of-use assets

 

 

(164

)

 

 

Property and equipment, net

 

$

21

 

 

Property and equipment, net

 

 

 

 

 

 

 

Finance lease liabilities

 

$

67

 

 

Accounts payable and other liabilities

 

 

Note 11. Subsequent Events

On October 29, 2019, the Company’s Board of Directors declared an extraordinary dividend of $3.50 per share payable on November 20, 2019 to shareholders of record as of November 13, 2019.

On October 29, 2019, the Company’s Board of Directors declared a quarterly cash dividend of $0.25 per share payable on December 27, 2019 to shareholders of record as of December 13, 2019. The Board considers the payment of a regular cash dividend each calendar quarter.

21


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

The following discussion should be read in conjunction with the accompanying unaudited consolidated financial statements and the related notes included in Item 1 of Part I of this Quarterly Report on Form 10-Q, together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Annual Report on Form 10-K for the year ended December 31, 2018.

We begin our discussion with an overview of our Company to give you an understanding of our business and the markets we serve. We then discuss our critical accounting policies. This is followed with a discussion of our results of operations for the three and nine months ended September 30, 2019 and 2018. This discussion includes an analysis of certain significant period-to-period variances in our consolidated statements of operations. Our cash flows and financial condition are discussed under the caption “Liquidity and Capital Resources.”

Business Overview

AMERISAFE is a holding company that markets and underwrites workers’ compensation insurance through its insurance subsidiaries. Workers’ compensation insurance covers statutorily prescribed benefits that employers are obligated to provide to their employees who are injured in the course and scope of their employment. Our business strategy is focused on providing this coverage to small to mid-sized employers engaged in hazardous industries, principally construction, trucking, logging and lumber, manufacturing, and agriculture. Employers engaged in hazardous industries pay substantially higher than average rates for workers’ compensation insurance compared to employers in other industries, as measured per payroll dollar. The higher premium rates are due to the nature of the work performed and the inherent workplace danger of our target employers. Hazardous industry employers also tend to have less frequent but more severe claims as compared to employers in other industries due to the nature of their businesses. We provide proactive safety reviews of employers’ workplaces. These safety reviews are a vital component of our underwriting process and also promote safer workplaces. We utilize intensive claims management practices that we believe permit us to reduce the overall cost of our claims. In addition, our audit services ensure that our policyholders pay the appropriate premiums required under the terms of their policies and enable us to monitor payroll patterns that cause underwriting, safety or fraud concerns. We believe that the higher premiums typically paid by our policyholders, together with our disciplined underwriting and safety, claims and audit services, provide us with the opportunity to earn attractive returns for our shareholders.

We actively market our insurance in 27 states through independent agencies, as well as through our wholly owned insurance agency subsidiary. We are also licensed in an additional 20 states, the District of Columbia and the U.S. Virgin Islands.

Critical Accounting Policies

Understanding our accounting policies is key to understanding our financial statements. Management considers some of these policies to be very important to the presentation of our financial results because they require us to make significant estimates and assumptions. These estimates and assumptions affect the reported amounts of assets, liabilities, revenues and expenses and related disclosures. Some of the estimates result from judgments that can be subjective and complex and, consequently, actual results in future periods might differ from these estimates.

Management believes that the most critical accounting policies relate to the reporting of reserves for loss and loss adjustment expenses, including losses that have occurred but have not been reported prior to the reporting date, amounts recoverable from reinsurers, premiums receivable, assessments, deferred policy acquisition costs, deferred income taxes, the impairment of investment securities and share-based compensation. These critical accounting policies are more fully described in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K for the year ended December 31, 2018.

22


Results of Operations

The following table summarizes our consolidated financial results for the three and nine months ended September 30, 2019 and 2018.

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

 

(dollars in thousands, except per share data)

 

 

 

(unaudited)

 

Gross premiums written

 

$

82,629

 

 

$

85,324

 

 

$

262,754

 

 

$

276,368

 

Net premiums earned

 

 

82,712

 

 

 

85,184

 

 

 

250,611

 

 

 

261,489

 

Net investment income

 

 

8,264

 

 

 

7,884

 

 

 

24,448

 

 

 

22,396

 

Total revenues

 

 

91,488

 

 

 

93,529

 

 

 

278,431

 

 

 

283,084

 

Total expenses

 

 

64,875

 

 

 

69,069

 

 

 

205,840

 

 

 

218,280

 

Net income

 

 

21,386

 

 

 

19,701

 

 

 

58,676

 

 

 

52,826

 

Diluted earnings per common share

 

$

1.11

 

 

$

1.02

 

 

$

3.04

 

 

$

2.74

 

Other Key Measures

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net combined ratio (1)

 

 

78.4

%

 

 

81.1

%

 

 

82.1

%

 

 

83.5

%

Return on average equity (2)

 

 

18.6

%

 

 

17.4

%

 

 

17.8

%

 

 

15.9

%

Book value per share (3)

 

$

24.29

 

 

$

23.82

 

 

$

24.29

 

 

$

23.82

 

 

(1)

The net combined ratio is calculated by dividing the sum of loss and loss adjustment expenses incurred, underwriting and certain other operating costs, commissions, salaries and benefits, and policyholder dividends by net premiums earned in the current period.

(2)

Return on average equity is calculated by dividing the annualized net income by the average shareholders’ equity for the applicable period.

(3)

Book value per share is calculated by dividing shareholders’ equity by total outstanding shares, as of the end of the period.

Consolidated Results of Operations for Three Months Ended September 30, 2019 Compared to September 30, 2018

Gross Premiums Written. Gross premiums written for the quarter ended September 30, 2019 were $82.6 million, compared to $85.3 million for the same period in 2018, a decrease of 3.2%. The decrease was attributable to a $7.3 million decrease in annual premiums on voluntary policies written during the period. Offsetting this decrease was a $4.1 million increase in premiums resulting from payroll audits and related premium adjustments for policies written in previous quarters and a $0.4 million increase in assumed premium from mandatory pooling arrangements. The effective loss cost multiplier, or ELCM, for our voluntary business was 1.62 for the third quarter ended September 30, 2019 compared to 1.65 for the same period in 2018.

Net Premiums Written. Net premiums written for the quarter ended September 30, 2019 were $80.5 million, compared to $83.0 million for the same period in 2018, a decrease of 3.1%. The decrease was primarily attributable to the decrease in gross premiums written. As a percentage of gross premiums earned, ceded premiums were 2.6% for the third quarter of 2019 and 2018.  For additional information, see Item 1, “Business—Reinsurance” in our Annual Report on Form 10-K for the year ended December 31, 2018.

Net Premiums Earned. Net premiums earned for the third quarter of 2019 were $82.7 million, compared to $85.2 million for the same period in 2018, a decrease of 2.9%. The decrease was primarily attributable to the decrease in net premiums written during the period.

Net Investment Income. Net investment income for the quarter ended September 30, 2019 was $8.3 million, compared to $7.9 million for the same period in 2018, an increase of 4.8%.  The increase was due to slightly higher investment yields on fixed-income securities.  Average invested assets, including cash and cash equivalents, were $1.2 billion in the quarter ended September 30, 2019 and 2018. The pre-tax investment yield on our investment portfolio was 2.7% per annum during the quarter ended September 30, 2019 compared to 2.6% per annum during the same period in 2018. The tax-equivalent yield on our investment portfolio was 3.1% per annum for the quarter ended September 30, 2019 and 3.0% for the same period in 2018. The tax-equivalent yield is calculated using the effective interest rate and the appropriate marginal tax rate.

Net Realized Gains (Losses) on Investments. Net realized losses on investments for the three months ended September 30, 2019 were immaterial compared to losses of $0.3 million for the same period in 2018. Net realized losses in the third quarter of 2018 were attributable to the call of fixed maturity securities.

23


Net Unrealized Gains (Losses) on Equity Securities. Net unrealized gains on equity securities for the three months ended September 30, 2019 were $0.4 million compared to net unrealized gains of $0.6 million for the same period in 2018.

Loss and Loss Adjustment Expenses Incurred. Loss and loss adjustment expenses (“LAE”) incurred totaled $44.3 million for the three months ended September 30, 2019, compared to $47.6 million for the same period in 2018, a decrease of $3.3 million, or 6.9%. The current accident year loss and LAE incurred were $60.0 million, or 72.5% of net premiums earned, compared to $60.9 million, or 71.5% of net premiums earned for the same period in 2018. We recorded favorable prior accident year development of $15.6 million in the third quarter of 2019, compared to favorable prior accident year development of $13.3 million in the same period of 2018, as further discussed below in “Prior Year Development.” Our net loss ratio was 53.6% in the third quarter of 2019, compared to 55.9% for the same period of 2018.

Underwriting and Certain Other Operating Costs, Commissions and Salaries and Benefits. Underwriting and certain other operating costs, commissions and salaries and benefits for the quarter ended September 30, 2019 were $19.3 million, compared to $20.6 million for the same period in 2018, a decrease of 6.4%. This decrease was primarily due to a $1.0 million decrease in insurance related assessments and a $0.3 million decrease in commission expense.  Our expense ratio was 23.3% in the third quarter of 2019 compared to 24.2% in the third quarter of 2018.

Income Tax Expense. Income tax expense for the three months ended September 30, 2019 was $5.2 million, compared to $4.8 million for the same period in 2018. The increase was attributable to an increase in the pre-tax income to $26.6 million in the quarter ended September 30, 2019 from $24.5 million in the same period in 2018. The effective tax rate for the Company increased to 19.6% in the quarter ended September 30, 2019 from 19.5% in the same period in 2018. The increase in the effective tax rate is due to a lower proportion of tax-exempt income to underwriting income in the quarter relative to the third quarter of 2018.

Consolidated Results of Operations for Nine Months Ended September 30, 2019 Compared to September 30, 2018

Gross Premiums Written. Gross premiums written for the first nine months of 2019 were $262.8 million, compared to $276.4 million for the same period in 2018, a decrease of 4.9%. The decrease was attributable to a $17.1 million decrease in annual premiums on voluntary policies written during the period. Offsetting this decreases was a $3.3 million increase in premiums resulting from payroll audits and related premium adjustments for policies written in previous quarters and a $0.3 million increase in assumed premium from mandatory pooling arrangements.  The ELCM for our voluntary business was 1.61 for the nine months ended September 30, 2019 compared to 1.65 for the same period in 2018.

Net Premiums Written. Net premiums written for the nine months ended September 30, 2019 were $256.0 million, compared to $269.4 million for the same period in 2018, a decrease of 5.0%. The decrease was primarily attributable to the decrease in gross premiums written. As a percentage of gross premiums earned, ceded premiums were 2.6% for the first nine months of 2019 and 2018.  For additional information, see Item 1, “Business—Reinsurance” in our Annual Report on Form 10-K for the year ended December 31, 2018.

Net Premiums Earned. Net premiums earned for the first nine months of 2019 were $250.6 million, compared to $261.5 million for the same period in 2018, a decrease of 4.2%. The decrease was primarily attributable to the decrease in net premiums written during the period.

Net Investment Income. Net investment income for the first nine months of 2019 was $24.4 million, compared to $22.4 million for the same period in 2018, an increase of 9.2%. The increase was due to slightly higher investment yields on fixed-income securities.  Average invested assets, including cash and cash equivalents were $1.2 billion in the nine months ended September 30, 2019 and 2018. The pre-tax investment yield on our investment portfolio was 2.7% per annum during the nine months ended September 30, 2019 compared to 2.5% per annum for the same period in 2018. The tax-equivalent yield on our investment portfolio was 3.1% per annum for the first nine months of 2019 compared to 3.0% in the same period in 2018. The tax-equivalent yield is calculated using the effective interest rate and the appropriate marginal tax rate.

Net Realized Gains (Losses) on Investments. Net realized losses on investments for the nine months ended September 30, 2019 were immaterial compared to net realized losses of $1.5 million for the same period in 2018.  Net realized losses in the first nine months of 2018 were attributable to the sale of equity and fixed maturity securities classified as available-for-sale and called fixed maturity securities.

Net Unrealized Gains (Losses) on Equity Securities. Net unrealized gains on equity securities for the nine months ended September 30, 2019 were $3.2 million compared to net unrealized gains of $0.3 million for the same period in 2018.

24


Loss and Loss Adjustment Expenses Incurred. Loss and LAE incurred totaled $142.8 million for the nine months ended September 30, 2019, compared to $152.8 million for the same period in 2018, a decrease of $10.0 million, or 6.6%. The current accident year loss and LAE incurred were $181.7 million, or 72.5% of net premiums earned, compared to $187.0 million, or 71.5% of net premiums earned, for the same period in 2018. We recorded favorable prior accident year development of $38.9 million in the first nine months of 2019, compared to favorable prior accident year development of $34.1 million in the same period of 2018, as further discussed below in “Prior Year Development.” Our net loss ratio was 57.0% in the first nine months of 2019, compared to 58.4% for the same period of 2018.

Underwriting and Certain Other Operating Costs, Commissions and Salaries and Benefits. Underwriting and certain other operating costs, commissions and salaries and benefits for the nine months ended September 30, 2019 were $59.7 million, compared to $62.2 million for the same period in 2018, a decrease of 4.0%. This decrease was primarily due to a $1.7 million decrease in insurance related assessments, a $0.8 million decrease in commission expense, and a $0.5 million decrease in premium tax expense.  Offsetting these decreases were a $0.4 million increase in compensation expense and a $0.3 million increase in accounts receivable write-offs.  Our expense ratio was 23.8% in the first nine months of 2019 and 2018.

Income Tax Expense. Income tax expense for the nine months ended September 30, 2019 was $13.9 million, compared to $12.0 million for the same period in 2018. The increase was attributable to an increase in pre-tax income to $72.6 million in the first nine months of 2019 from $64.8 million in the first nine months of 2018. The effective tax rate for the Company increased to 19.2% for the nine months ended September 30, 2019 from 18.5% for the nine months ended September 30, 2018.  The increase in the effective tax rate is due to a lower proportion of tax-exempt income to underwriting income and an increase of $0.2 million for the change in valuation allowance for deferred tax assets for the nine months ended September 30, 2019 compared with the nine months ended September 30, 2018.

Liquidity and Capital Resources

Our principal sources of operating funds are premiums, investment income and proceeds from sales and maturities of investments. Our primary uses of operating funds include payments of claims and operating expenses. Currently, we pay claims using cash flow from operations and invest the remaining funds.

Net cash provided by operating activities was $62.5 million for the nine months ended September 30, 2019, which represented a $8.3 million decrease from $70.7 million in net cash provided by operating activities for the nine months ended September 30, 2018. This decrease in operating cash flow was due to $16.9 million in lower premium cash receipts, an $8.5 million increase in federal taxes paid, a $1.6 million increase in underwriting expenses paid and a $0.8 million increase in dividends paid to policyholders.  Offsetting these amounts were an $11.9 million decrease in losses paid and a $7.9 million decrease in amounts held by others.

Net cash provided by investing activities was $37.8 million for the nine months ended September 30, 2019, compared to net cash used in investment activities of $80.1 million for the same period in 2018. Cash provided by sales and maturities of investments totaled $283.8 million for the nine months ended September 30, 2019, compared to $213.8 million for the same period in 2018. A total of $245.2 million in cash was used to purchase investments in the nine months ended September 30, 2019, compared to $293.0 million in purchases for the same period in 2018.

Net cash used in financing activities in the nine months ended September 30, 2019 was $14.7 million compared to net cash used in financing activities of $12.9 million for the same period in 2018. In the nine months ended September 30, 2019, $14.7 million of cash was used for dividends paid to shareholders compared to $12.9 million in the same period of 2018.  

Investment Portfolio

Our investment portfolio, including cash and cash equivalents, totaled $1.2 billion at September 30, 2019 and December 31, 2018. Purchases of fixed maturity securities are classified as available-for-sale or held-to-maturity at the time of purchase based on the individual security. The reported value of our fixed maturity securities classified as held-to-maturity, as defined by FASB ASC Topic 320, Investments-Debt and Equity Securities, was equal to their amortized cost, and thus was not impacted by changing interest rates. Our equity securities and fixed maturity securities classified as available-for-sale were reported at fair value.

25


The composition of our investment portfolio, including cash and cash equivalents, as of September 30, 2019, is shown in the following table:

 

 

 

Carrying

Value

 

 

Percentage of

Portfolio

 

 

 

(in thousands)

 

Fixed maturity securities—held-to-maturity:

 

 

 

 

 

 

 

 

States and political subdivisions

 

$

438,055

 

 

 

36.0

%

Corporate bonds

 

 

115,982

 

 

 

9.5

%

U.S. agency-based mortgage-backed securities

 

 

11,910

 

 

 

1.0

%

U.S. Treasury securities and obligations of

   U.S. government agencies

 

 

37,513

 

 

 

3.1

%

Asset-backed securities

 

 

701

 

 

 

0.1

%

Total fixed maturity securities—held-to-maturity

 

 

604,161

 

 

 

49.7

%

Fixed maturity securities—available-for-sale:

 

 

 

 

 

 

 

 

States and political subdivisions

 

 

230,191

 

 

 

18.9

%

Corporate bonds

 

 

145,421

 

 

 

12.0

%

U.S. agency-based mortgage-backed securities

 

 

24,423

 

 

 

2.0

%

U.S. Treasury securities and obligations of

   U.S. government agencies

 

 

40,182

 

 

 

3.3

%

Total fixed maturity securities—available-for-sale

 

 

440,217

 

 

 

36.2

%

Equity securities

 

 

25,936

 

 

 

2.1

%

Short-term investments

 

 

20,964

 

 

 

1.7

%

Cash and cash equivalents

 

 

125,870

 

 

 

10.3

%

Total investments, including cash and cash equivalents

 

$

1,217,148

 

 

 

100.0

%

 

Our debt securities classified as available-for-sale are “marked to market” as of the end of each calendar quarter. As of that date, unrealized gains and losses are recorded to Accumulated Other Comprehensive Income (Loss), except when such securities are deemed to be other-than-temporarily impaired. For our securities classified as held-to-maturity, unrealized gains and losses are not recorded in the financial statements until realized or until a decline in fair value, below amortized cost, is deemed to be other-than-temporary.  The change in fair value of our equity investments is presented as a component of net income.

During the three and nine months ended September 30, 2019 and 2018, there were no impairment losses recognized for other-than-temporary declines in the fair value of our investments.

Prior Year Development

The Company recorded favorable prior accident year development of $15.6 million in the three months ended September 30, 2019. The table below sets forth the favorable development for the three and nine months ended September 30, 2019 and 2018 for accident years 2014 through 2018 and, collectively, for all accident years prior to 2014.

 

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

 

 

(in millions)

 

Accident Year

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2018

 

$

 

 

$

 

 

$

 

 

$

 

2017

 

 

1.9

 

 

 

 

 

 

3.2

 

 

 

 

2016

 

 

6.5

 

 

 

2.4

 

 

 

15.9

 

 

 

5.6

 

2015

 

 

3.3

 

 

 

4.9

 

 

 

8.3

 

 

 

14.3

 

2014

 

 

2.0

 

 

 

3.1

 

 

 

6.3

 

 

 

7.4

 

Prior to 2014

 

 

1.9

 

 

 

2.9

 

 

 

5.2

 

 

 

6.8

 

Total net development

 

$

15.6

 

 

$

13.3

 

 

$

38.9

 

 

$

34.1

 

 

26


The table below sets forth the number of open claims as of September 30, 2019 and 2018, and the number of claims reported and closed during the three and nine months then ended.

 

 

 

Three Months Ended September 30,

 

 

Nine Months Ended September 30,

 

 

 

2019

 

 

2018

 

 

2019

 

 

2018

 

Open claims at beginning of period

 

 

4,978

 

 

 

5,022

 

 

 

5,190

 

 

 

4,982

 

Claims reported

 

 

1,472

 

 

 

1,536

 

 

 

4,032

 

 

 

4,181

 

Claims closed

 

 

(1,414

)

 

 

(1,273

)

 

 

(4,186

)

 

 

(3,878

)

Open claims at end of period

 

 

5,036

 

 

 

5,285

 

 

 

5,036

 

 

 

5,285

 

 

The number of open claims at September 30, 2019 decreased by 249 claims as compared to the number of open claims at September 30, 2018. At September 30, 2019, our incurred amounts for certain accident years, particularly 2014 through 2017, developed more favorably than management previously expected. The revisions to the Company’s reserves reflect new information gained by claims adjusters in the normal course of adjusting claims and is reflected in the financial statements when the information becomes available. It is typical for more serious claims to take several years or longer to settle and the Company continually revises estimates as more information about claimants’ medical conditions and potential disability becomes known and the claims get closer to being settled.  Multiple factors can cause both favorable and unfavorable loss development. The favorable loss development we experienced across accident years was largely due to favorable case reserve development from closed claims and claims where the worker had reached maximum medical improvement.

The assumptions we used in establishing our reserves were based on our historical claims data. However, as of September 30, 2019, actual results for certain accident years have been better than our assumptions would have predicted. We do not presently intend to modify our assumptions for establishing reserves in light of recent results. However, if actual results for current and future accident years are consistent with, or different than, our results in these recent accident years, our historical claims data will reflect this change and, over time, will impact the reserves we establish for future claims.

Our reserves for loss and loss adjustment expenses are inherently uncertain and our focus on providing workers’ compensation insurance to employers engaged in hazardous industries results in our receiving relatively fewer but more severe claims than many other workers’ compensation insurance companies. As a result of this focus on higher severity, lower frequency business, our reserve for loss and loss adjustment expenses may have greater volatility than other workers’ compensation insurance companies. For additional information, see Item 1, “Business—Loss Reserves” in our Annual Report on Form 10-K for the year ended December 31, 2018.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

Market risk is the risk of potential economic loss principally arising from adverse changes in the fair value of financial instruments. The major components of market risk affecting us are credit risk, interest rate risk, and equity price risk. We currently have no exposure to foreign currency risk.

Since December 31, 2018, there have been no material changes in the quantitative or qualitative aspect of our market risk profile. For additional information regarding the Company’s exposure to certain market risks, see Item 7A, “Quantitative and Qualitative Disclosures About Market Risk” in our Annual Report on Form 10-K for the year ended December 31, 2018.

27


Item 4. Controls and Procedures.

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this report to provide reasonable assurance that information we are required to disclose in reports that are filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms specified by the SEC. We note that the design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving the stated goals under all potential future conditions.

Because of its inherent limitations, management does not expect that our disclosure controls and procedures and our internal controls over financial reporting will prevent or detect all misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions or that the degree of compliance with policies and procedures may deteriorate. Any control system, no matter how well designed and operated, is based upon certain assumptions and can only provide reasonable, not absolute assurance that its objectives will be met. Further, no evaluation of controls can provide absolute assurance that misstatements due to errors or fraud will not occur or that all control issues and instances of fraud, if any within the Company, have been detected.

There have not been any changes in our internal control over financial reporting during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

28


PART II—OTHER INFORMATION

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

The Board of Directors initially authorized the Company’s share repurchase program in February 2010. In October 2016, the Board reauthorized this program with no expiration date. As of September 30, 2019, we had repurchased a total of 1,258,250 shares of our outstanding common stock for $22.4 million.  The Company had $25.0 million available for future purchases at September 30, 2019 under this program.  There were no shares repurchased during the three months ended September 30, 2019 and 2018. The purchases may be effected from time to time depending upon market conditions and subject to applicable regulatory considerations.  It is anticipated that future purchases will be funded from available capital.  

Item 6. Exhibits.

 

Exhibit

No.

 

Description

 

 

 

  31.1

 

Certification of G. Janelle Frost filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

  31.2

 

Certification of Neal A. Fuller filed pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

 

 

 

  32.1

 

Certification of G. Janelle Frost and Neal A. Fuller filed pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

101.INS

 

XBRL Instance Document – The instance document does not appear in the interactive data file because its XBRL tags are embedded within the Inline XBRL document

 

 

 

101.SCH

 

Inline XBRL Taxonomy Extension Schema Document

 

 

 

101.CAL

 

Inline XBRL Taxonomy Extension Calculation Linkbase Document

 

 

 

101.LAB

 

Inline XBRL Taxonomy Extension Label Linkbase Document

 

 

 

101.PRE

 

Inline XBRL Taxonomy Extension Presentation Linkbase Document

 

 

 

101.DEF

 

Inline XBRL Taxonomy Extension Definition Linkbase Document

 

 

 

104

 

Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101)

 

29


SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

 

 

AMERISAFE, INC.

 

 

 

November 1, 2019

 

/s/ G. Janelle Frost

 

 

G. Janelle Frost

 

 

President, Chief Executive Officer and Director

 

 

(Principal Executive Officer)

 

 

 

November 1, 2019

 

/s/ Neal A. Fuller

 

 

Neal A. Fuller

 

 

Executive Vice President and Chief Financial Officer

 

 

(Principal Financial and Accounting Officer)

 

30